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How Can Effective Asset Management Help Me Reach Financial Independence? Thumbnail

How Can Effective Asset Management Help Me Reach Financial Independence?

Retirement Funding Insights

How Can Effective Asset Management Help Me Reach Financial Independence?

Topics: Spenders vs Savers, 4% Rule, Savings rate, the New 50/30/20, Passive Income

In my last blog I asked the question: Should I Pay Off My Mortgage Early?

If that is a question you’ve been asking, then you likely have excess cash and are considering your best Asset Management options. You might also already be considering today’s question that contemplates Financial Independence and retirement ahead of the traditional schedule. Or if not, maybe you should be. In previous posts I’ve referenced the topic of FIRE (Financial Independence/ Retire Early) and several of those recent topics I wrote about are related to “achieving FIRE” in an effort to bring awareness to the possibility. The topics are inter-related too since achieving FIRE generally requires discipline of saving, living within your means according to a budget and strategically seeking methods of directing available cash for future goals. If you want to explore what Financial Independence looks like for your future, you need to have a good understanding of your current financial status. So if you’re looking for a starting point on your financial path including your financial goals and strategy, let’s set up time to talk: matt@mhb-advisory.com.

FIRE seems to be popular among those that either have high income levels or the extremely thrifty due to a desire to escape the “daily grind.” Both those groups would conceivably be able to achieve FIRE more quickly. For most of the rest of us the cost of our lifestyle often gets in the way of reaching FIRE. However, the common denominator for those seeking FIRE is the desire to create more free time and the ability to increase savings rate. The idea of FIRE is often compelling enough for many to make lifestyle adjustments in order to at least consider the possibility of reaching Financial Independence and Retiring Early. At a minimum you should at least be contemplating a plan to outlive your job!

I love the sports analogy (and sports in general – let’s be honest!) related to building wealth: you have offense (high wages, ability to earn more through bonus performance, side hustles, etc.) and defense (living frugally – well below your means to increase your savings rate). Generally, championship teams in any sport are good at both offense and defense to some extent, while the average team often seems to be good at just one and is often not good at the other (or maybe that’s just my team). High income earners often spend to maintain lifestyle, while those willing to pinch pennies are often content to not seek additional income-generating opportunities.

The median living retiree today left work at age 62. Why is that significant? That’s the earliest a retiree can begin collecting social security. Either that’s a big coincidence or the average retiree is somewhat allowing the federal government to tell them when they can retire. You can actually tap retirement accounts a couple years before that at age 59.5 without penalty (check out our post: Are Maximum 401k Contributions Best for My Asset Management Strategy?). Given these facts and that the government is moving the “full retirement age” to 67 (LOL!), we aren’t exactly encouraged to pursue “early retirement” and have to find more creative ways to get there. These arbitrary age limits could be due to the fact that in most cases it takes half a lifetime of working to have enough money to retire, but the new way of thinking is looking to change that based on better understanding of your investments.

Know Who You Are – Spenders vs. Savers

There are two types of people in this world: Savers and Spenders. Savers save and Spenders spend as you may have guessed. When two people get married and try to combine their lives and their finances, it can get interesting. Two Savers may actually have a hard time spending money. Admittedly I’m a Saver, so I prefer not to spend unless it’s on something I think can make me more money – kind of crazy I know. What’s the point of having money if you don’t spend it? One Spender and one Saver can create some conflict but usually they can learn some things from the other and balance out lifestyle with saving though not necessarily without some disagreements. And when two Spenders unite, savings often take a back seat to other aspects of life enjoyment. All these scenarios can end favorably, but I think it’s helpful to know how you are wired and who you married. And how you both think about money.

If spending isn’t supported by income and saving for the future is ignored for too long, then that is an issue. Particularly as we fall into the trap of lifestyle creep. Few can avoid it. Get a raise, buy a bigger house. Big bonus, big vacation! Those aren’t necessarily bad things – I do my best to enjoy life today (but on a budget!), but I want to encourage the idea of maintaining the pace of savings to achieve your financial goals. The path may not be a straight line given all life’s changes, but rather a series of ups and downs. The goal when your down is then to get back up and get your savings on track.

4% Rule of Thumb

How do you know when you have enough money to retire? According to this rule, you should have enough to take out 4% of your portfolio for annual expenses each year (and adjust spending if necessary), providing a high likelihood of not running out of money for 30 years. Doing the math the other way, you should have 25 times the amount of income you plan to spend in retirement annually. Spending in retirement is likely less than your pre-retirement spending since you aren’t saving for retirement, maybe you paid off your mortgage, don’t have any college expenses, etc. However, if you want to travel or spoil your grandchildren or are self-funding things like healthcare expenses, then your income could easily be the same or more. So…if you are spending $5,000 a month, or $60,000 a year before retirement, the 4% rule suggests you need a retirement portfolio of $1.5 million! The FIRE community seems to rely pretty heavily on the 4% Rule. I like the rule as well, though more recently, doubters have denounced its effectiveness, a topic we will spend a little more time on in our next post.

Savings Rate

Mega-money-management firm Fidelity has done the math and they suggest saving 15% of pre-tax income, which is based on spending needs in retirement, as well as a saving timeline that spans from age 25-67(!) when you retire. Their example adjusts for inflation and builds in modest increases in income and all that fun stuff. The 15% includes employer match (if employer contributes 3%, you just have to come up with 12%), but also takes into account your future social security income. So, to be average, you need to start saving 15% of your income at age 25. For those starting later in life, your savings rate will need to be higher (Fidelity notes 18% for a starting age of 30 and 23% at age 35). So being above average and reaching for FIRE suggests a savings rate well above 15%, even as the national average savings rate continues to be closer to half that level, as the graphic below indicates.

The New 50/30/20

In an earlier post (How Do I Get Out of Credit Card Debt and Start a Budget?), we discussed the 50/30/20 rule as a means of strategically budgeting and saving, implying 50% of your budget for necessities, 30% for discretionary items and 20% for saving and debt reduction. Going back to the sports analogy, the new way of thinking about the 50/30/20 would be a solid defense. The new version of the 50/30/20 rule shifts the categories to direct 30% of your income to necessities and 20% to discretionary items. That would allow a 50% savings rate! I would include all pre-tax, employer-provided funds, college planning contributions and all after-tax savings, but that would put you on track for some serious FIRE! That may be a stretch but if you want your life to change in a serious way, you need to make some serious changes. This is where long-term goals and current lifestyle often collide – so while a 50% savings rate seems crazy, it’s not impossible. You have to do what works for you with your long-term goals in mind.

Passive Income

If living WAY within your means to control spending is our defense, then we need to come up with a suitable offense. There are only so many hours you can work and your boss is only willing to trade a certain amount of her dollars for your hours. However, if you could make money while you sleep, while you eat, really while you are doing anything else, wouldn’t that be nice? If you could earn income passively, wouldn’t that make a difference in your life?

Likely the best opportunity to improve on offense is generating passive income. Both myself and the FIRE community favor real estate for its cash flow, appreciation and tax benefits. Traditional assets like fixed income can provide cash flow as well. The biggest challenge here is saving up dollars after paying taxes on those dollars to contribute in a meaningful way to get a suitable return (a 50% target savings rate would be a tremendous start!). Then the ultimate goal is replacing your income with passive income. To overcome that challenge, you may need to reduce pre-tax savings (Are Maximum 401k Contributions Best for My Asset Management Strategy?) – it all depends on what your goals are.

So, in summary, I’m not actually suggesting your offense or defense needs to be at a championship level but being good on both sides of the ball can get you where you want to be quicker. Lowering your expenses and building up passive cash flow to cover those expenses can impact both sides of the wealth equation.

I also want to reiterate this is a post for everyone, not those of a certain age, or income level or savings rate. So it’s impossible to offer an ideal age to achieve FIRE, but the point is to have a plan versus just accepting that you have to work all your life until you arrive at some arbitrary age where you can utilize retirement account funds or receive social security payments. Understand your situation today and make a timeline – 5 years, 10 years, 20 years – you aren’t too young to think about retirement, or better yet Financial Independence.

If you or someone you know has any financial-related questions, I would love to have a conversation, so please feel free to reach out: matt@mhb-advisory.com

And please don’t forget to view our prior blogs:

Why Should I use a Financial Advisor for Asset Management?

How Do I Get Out of Credit Card Debt and Start a Budget?

Are Maximum 401k Contributions Best for My Asset Management Strategy?

Should I Pay Off My Mortgage Early?

And stay tuned for our additional blog posts on retirement savings, college planning and other topics.

Best wishes on your financial path!


This post was created by Matt Beeby, the Founder of MHB Advisory Services. Matt has been working in Financial Services and investing in real estate since 2005, though his investment experience spans nearly two decades. He is a Christ follower, active in both his church and his neighborhood association. Matt enjoys sports and family time. Read more about Matt on his website bio.


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